Value of Minimum Wage Is Eroded Quickly by Inflation

May 12, 2014

The real value of the minimum wage has
fallen sharply since its peak, in 1968. Adjusted for inflation, the
minimum wage in 1968 was $10.86 per hour. Now at $8.00/hr., under
current law, the real value of Massachusetts’s minimum wage
would drop to $7.01/hr. by 2020 if no adjustments are made.

Currently,
there are three different proposals before the Legislature
to raise Massachusetts’s minimum wage. Each proposal takes a
phased approach, raising the wage in steps over a number of years. When
the phase-in periods are complete, two of the three proposals then
begin making automatic adjustments for inflation (also called
“indexing”), to keep pace with the rising cost of
living. Once indexing begins, this will maintain the real value of the
wage in future years for these two proposals.

Prior to the start of indexing, however (i.e., during the phase-in
period), inflation will gradually reduce the real value of the stepped
wage increases, even as they occur. Thus, while a minimum wage worker
may eventually be paid as much as $11/hr. in 2016 dollars, this 2016
wage would be worth the equivalent of only $10.43 in
today’s dollars. (See chart, below. Note: because several
proposals share
identical stepped increases, some lines overlap.) This is substantially
less than the real value of the minimum wage in 1968. For any proposal
that does not include eventual indexing, the real value of the wage
would decline, due to inflation, with each passing year (again, see
chart, below).

Indexing the new minimum wage
to the Consumer Price Index (CPI) - as
has been proposed - thus would help maintain its value over time (use MassBudget’s
online tool to see what the minimum wage would be today if it had
kept pace with other economic indicators). Indexing to the CPI,
however, would not ensure that the minimum wage
would grow – rather than just maintain its value –
when productivity improves and the overall economy grows. To achieve
that goal, the minimum wage would need to be indexed to a different
measure, such as growth in productivity or economic output.

Massachusetts Budget and Policy Center

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